Top Stories of 2014: The Buy Side Beefs Up

Sometimes, it can all come apart very quickly ─ just ask my beloved but oft-disappointing Philadelphia Eagles.

A few weeks ago, they had a 91.5-percent chance of making the NFL playoffs, according to advanced statistical projections. After three consecutive losses, that percentage wasn't just been halved, or even "remote"...it's zero.

Macro and event-driven fund managers can probably relate after a bumpy ride snuck up on them in October. Then, a week of increasing equities volatility combined with some big bets going horribly sideways resulted in the treasuries market briefly-but-sepctacularly buckling on October 15th. For a terrific blow-by-blow account of how that unfolded ─ or for anyone interested in learning what a 'gamma trap' looks like ─ I strongly recommend Kris Devasabai's cover story on the subject in our sibling publication, Risk. 

But that week and its aftermath also serves to bookend what was a very interesting 2014 for the buy side's technology, too. On one hand, we saw certain trends circulating around the industry continue their march towards relevance ─ newfangled (and uninterrogated) no more. A few regulatory reporting itches persisted, as well.

On the other hand, volatility started popping up in regular patches and the interest rate conversation heated up, even if we're still waiting for them to rise.

More than once, we heard that this is the stressful trading environment we've all been waiting for, when post-crisis investment in technology would really pay off. After all, it doesn't take a failed bank or worthless swaps to start a collapse ─ just the right little problems, lining up in the right way.

More than once, we heard that this is the stressful trading environment we've all been waiting for, when post-crisis investment in technology would really pay off.

With that, here is a collection of interesting opinions and the most important takeaways from the last 12 months.

IBOR-mania

Let's start with the hype cycle. Most of the buy side doesn't face the data mangement challenges investment banks do; yet the investment book of record (IBOR) concept, pulling together order management, accounting, and portfolio management functions, continued its push in 2014 unabated. Thankfully it moved on from definitional debates to implementation concerns. 

The greatest among those concerns, our US Editor Anthony Malakian found, is the ability for technologists to wrest spreadsheets from portfolio managers, who have an annoying procilvity for running their position keeping and modeling on their own, as they're used to, rather than within the confines of an enterprise-wide platform. The fact that these implementations usually take years and a great deal of heavy lifting only makes that challenge more acute.

It's probably too early to know the outcome of this technology-cum-marketing campaign. Vendors can't be faulted for their ambition; they're not going after a non-problem, of course. One just wonders if the solution is too big for the small guys, and too stiff for the larger ones.

Mixed Signals on OEMS

Another trendy systems combination going into 2014 was the concept of a hybrid order and execution management system, or OEMS. Unlike IBOR—which popped up out of nowhere after years of rhetorical dormancy—OEMS has been percolating on the front burner for some time, with jaunty new providers like Liquid Holdings joining the fray. After all, for investment managers who want to have a dedicated EMS function, this setup just makes common sense.

Or does it? Interestingly, two of the providers in the space—Goldman spinoff REDI and Eze Software Group—seemed to shy away from the concept a bit this year. The former focused on opening up its technology, as well as integrating its newly-acquired InstaQuote EMS from BAML.

The latter, meanwhile, told BST just a couple weeks ago that during its recently-completed RealTick EMS-Eze OMS integration, it specifically sought to avoid OEMS functionality and livery, citing flexibility of delivery. Should be interesting to watch.

Best Ex's Bright Remake

From AHL Man Group and State Street Global Advisors (SSGA), one of the largest asset managers in the world, to tiny managed futures shops, another persistent theme this year was sharper focus on best execution algorithms and research in non-equities asset classes, specifically futures and treasuries.

Given present-day trading styles and higher speeds, this probably comes as little surprise, but the sophistication and investment now backing this area is impressive, particularly considering its heritage.

EMIR's Ugly Redo

Speaking of heritage, European Market Infrastructure Regulation (EMIR) has a lot of it—and not in an especially good way.

As we witnessed thoughout the year, it's really been trial by fire for the new unique trade identifiers (UTIs) demanded by the scheme, and the result has been a data governance nightmare for the buy side. Major firms like Bloomberg have gotten on top of it, but EMIR is yet more proof that education before implementation is well worth the spend, and even a few months delay, if it helps avoid a technology mess later.

Small is Beautiful

Whether it's post-2008 recovery in full swing, the Volcker Rule, or traders just plain feeling it's the right time, we've also seen a tremendous upswing in the number of boutique firms branching out on their own, and the attention tech providers are paying them.

Four such firms spoke to Waters this fall about their IT needs and priorities for vendor selection, highilghting the fact that it's really not sufficient to offer an off-the-shelf, 'hedge fund in a box' solution anymore. More care is required.

Who's Your CTO?

Lastly, where would the space be without its leaders?

We were fortunate this year to have tremendous variety for our Waters C-level cover profiles come from the buy side—everyone from a massive endowment manager in Texas to a major Paris-based asset manager; from a futures prop trading shop in Prague and fast-rising Brazilian hedge fund, to a private equity giant, an insurance mainstay, and a boutique manager in New York. Likewise, we've never attracted such positional diversity: a COO and CISO joined our traditional ranks of CTOs and CIOs.

Each brought unique and extraordinary experience to the table, proving that one buy-side trend is firmly here to stay: your chief technologist—whatever his or her title—shouldn't be sequstered in a dark room somewhere, plugging away. In the best cases, their involvement in the firm grows ever greater.